Why Do You Need Title Insurance?

If you have ever purchased a house through a realtor and with a mortgage, then you have seen a title commitment. This is a "bill of health" from a title insurance company, alerting you to those owners the property you are purchasing and to any liens, mortgages, or encumbrances on the property. It is essential that you get a title commitment and title insurance.

A typical sales agreement requires the seller to give the buyer a "warranty" deed. The word "warranty" means that the seller is guaranteed to the buyer that he / she owns the property, that it consist of the legal description set forth in the title commitment, and that the liens, encumbrances, and mortgages will have been discharged at the time of closing so that the property is transferred without any baggage. As an aside, if the sales agreement was signed by one person but the title commitment indicating that there are two owners of the property, both of the owners must sign the closing documents for the sale to be consummated. If the property is owned by an estate (because the owner died), the personal representative may need to get a court order to obtain the authority to sign a deed on behalf of the estate. If the property is owned by a corporation, then a majority of the shareholders must consent to the sale through a corporate resolution for the sale to be effective.

When there is no title insurance guaranteeing the legal description, the legal owner, and the absence of encumbrances at the time of closing, the buyer usually receives a mere "quit claim" deed. This means "buyer beware" -in spades. The buyer may later have a claim for fraud against the seller, but that means a lawsuit and potential problems with collecting on a judgment. If, on the other hand, you have title insurance and discover that legal description was wrong, the seller did not have the right to sell the property, and / or liens or other encumbrances were not disclosed or not discharged, you can file an insurance claim and hopefully be paid almost immediately.

When you buy property, especially if it has been foreclosed or you are buying it as a "short sale," be sure to get a title insurance commitment. The commitment provides direction for what needs to be done to remove liens, encumbrances, and mortgages from the public record. The commitment, however, can "expire." There is a date, usually at the top, that reflects the last date that title to the property was checked. You can request that the title commit be "updated" to the date of the sale. If it is not and you accept a commitment with a stale date, then you may not be able to complain if the IRS filed a lien against the property the day before the sale, and the title company did not discover it. Because title insurance companies are connected these days to the Register of Deeds office, it is not burdensome for them to do a last minute check.

As a last issue, when property has been foreclosed, there is a "redemption period" (generally six months) after the sheriff's sale during which the owner can "redeem" the property. To redeem, the owner must go to the Register of Deeds office with a cashier's check for the amount paid at the sheriff's sale plus the interest that has accrued since the sale. If the owner manages to sell the property during this redemption period, that may produce sufficient money to redeem the property. The problem is that if the property is redeemed, then all of the mortgages or liens that were recorded after the foreclosed mortgage was recorded are reinstated and remain attached to the property.

For example, assume the following:

On January 5, 2008, Bank of America recorded a $ 100K mortgage loan to the owner. On September 9, 2009, Quicken Loans recorded a $ 50K secured equity line. On March 2, 2010, the IRS filed a lien for $ 100K.

If (a) Bank of America foreclosed on the $ 100K mortgage loan; (b) Bank of America "bid" $ 100K at the sheriff's sale (and then offered to cancel the mortgage in exchange for the property); and (c) the owner did not redeem the property-then the consequent Quicken Loans' loan and the IRS lien will be extinguished. Bank of America will own the property outright.

If, on the other hand, a) Bank of America foreclosed on the $ 100K mortgage loan; (b) Bank of America "bid" $ 100K at the sheriff's sale (and then offered to cancel the mortgage in exchange for the property); and (c) the owner did redeem the property -then the consequent Quicken Loans' loan and the IRS lien remaining an encumbrance against the property. If someone bought the property during the redemption period, even in a short sale, that person would have paid something to the owner to purchase the property but would have actually purchased property still subject to the $ 50K secured equity line and the $ 100K IRS lien . Only the complete running of the redemption period extinguishes consequent liens, mortgages, and encumbrances without those residual lenders or lien holders agree to release their interest in the property. If you are still dealing with the owner of foreclosed property, the property is undrawn still in the redemption period-and there before you MUST BEWARE !!

It is imperative that purchasers of real estate obtain title insurance and the wisdom of a good title insurance company. As they say, "If it's too good to be true, then it probably is not true." While in most real estate deals the seller pays for the title insurance, there is nothing to prevent a buyer from obtaining title insurance himself. At the minimum, a buyer should obtain a title search of the property (current to the date of sale) before any purchase.

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